Contract or Written Offer – what do you do?
With most micro or small businesses that are simple in nature, it is generally accepted that you make an offer under contract.
A Contract is binding once both parties have signed the contract as it states all the conditions and terms of the Agreement
A Written Offer on a Business may not be a binding agreement, as it generally does not state the terms under which the agreement is made and is simply an understanding between the parties on a number of points and generally a price.
WHY? - You could miss out on the business
Many small businesses are a good buy and often have a number of interested parties. The Buyer that goes to Contract generally wins.
If you choose to arrange finance, talk to accountants and solicitors, think about it, do due diligence analyse and generally procrastinate, the other Buyer has beaten you to the business. This has happened many times to the detriment of the intended Buyer. Best advice is if you are a serious Buyer for the business, go to Contract and then give yourself a few weeks to carry out your ful due diligence.
Nothing worse than spending your time, having your accountant and solicitor bill you for their time and checking out everything to have it all wasted because another Buyer went to contract first.
If you like a business, it fits with your life style, provides you what you are looking for.
Discuss your offer with the Business Broker and provide the details for a contract.
If you are unsure about a few things with the business, these can be ironed out during the due diligence process. Know what it is that you should be looking for on a business, before you start the process. This will save you time and money and make a decision on a business easier.
Normally with a contract, you have these options.
- Subject to Due Diligence
Here you can check out all that you want about the business, financials, accounts, debtors and creditors, stock, business processes, staff activity, owners involvement, how things are done and verify the income and profits.
If you are not satisfied you have the option to cancel the contract and or make a change to your offer. If you cancel the contract your deposit is returned.
- Subject to Finance
If your contract is subject to finance, you will have enough time to get bank or finance approval. If you do not get finance the contract is cancelled and your deposit is returned.
- Subject to Assignment of the Lease or a New Lease
There can be a lease, Commercial Tenancy agreement or Rent agreement. For a going concern these agreements will have to be transferred from the Seller to the Buyer. There are some legal requirements in the transferring of Retail Shop Leases and have to be followed correctly. The buyer has to provide details to the Landlord for approval of the New Lease or Assignment.
If you the Buyer do not accept the requirements of the Agreement then you also have the right to cancel the contract and have your deposit returned.
- Further items subject to the sale of the Business under your contract could also be included, depending on the type or complexity of the business.
When all items in the contract are approved by the Buyer, the contract becomes unconditional and the Contract conditions are carried out up to settlement.
A Verbal Offer in a business deal can be a wast of time. It has no value, it is a simple indication of what a person is thinking. Most Business Brokers and Sellers would not consider going anywhere with a verbal offer only. The Buyer or the seller is not committed. If a verbal offer was extremely low, one can imagine the response from a Seller, if a Business Broker even forwarded it to the Seller.
An offer on a business is not a contract and is generally unenforceable.
An offer is generally made on a business by a Buyer who is looking to negotiate a complex or larger type of business.
Offers can be made on micro or small businesses, however most Sellers will not negotiate on an offer because many Buyers are just fishing to see if the Seller is serious on the asking price.
An offer on a business of a larger nature or on a complex operation will include the price to be offered, but also the terms on which the contract is to be based. The offer can be simple or complex. Generally in this context, negotiations between the Buyer and the Seller and their respective representatives will take place after mutual confidentialities are signed and certain undertakings are made. Generally the Buyer also discloses its ability to buy and operate the business.
Talk to your Business Broker
Business Brokers may do things differently, so it is always best to discuss your interest with the Business Broker. Whether a Contract or an Offer may also depend on the Seller and the type of business and the current interest in the business.